Distribution of Education Tax Benefits by Income over Time

The implementation of the American Opportunity Tax Credit in 2009 shifted the benefits of the education tax credits from filers with incomes between $25,000 and $100,000 to those with lower and higher incomes.

Notes & Sources

NOTES: The total and average values of tax credits and deductions are best estimates based on data from the Internal Revenue Service. A portion of nonrefundable dollars claimed on nontaxable returns is excluded to account for credits and deductions that do not reduce tax liability. The value of tax deductions is estimated based on applicable marginal tax rates. Percentages may not sum to 100 because of rounding.

In 2016, about a quarter of the benefits of the federal education tax credits went to tax filers with incomes between $100,000 and $180,000; a slightly smaller share went to filers with incomes of $25,000 or less; and just over half went to those with incomes between $25,000 and $100,000.

Tax savings for students and parents who claimed education tax credits averaged about $1,500 in 2016.

Education tax credits and deductions are “tax expenditures.” They reduce federal income tax liabilities and federal tax revenues and have the same impact on the federal budget as direct expenditures such as Pell Grants.

The American Opportunity Tax Credit, which accounts for most of the total credits and deductions, is available to taxpayers with adjusted gross incomes as high as $180,000. The maximum benefit per filer is $2,500, with up to $1,000 of that amount available as a refund to filers with no tax liability.

Because the credit is only partially refundable, many low-income filers who have low tax liabilities, if any, receive smaller credits than higher-income filers who can subtract the full credit from the amount they owe.

About one quarter of undergraduates are ineligible for education tax credits because they do not pay tuition out of pocket. Many low-income students receive federal and state grant aid that covers tuition and fees; living costs are not qualifying expenses for education tax credits and deductions. (Delisle and Dancy, “A New Look at Tuition Tax Benefits,” 2015)